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THE improving economy and more ‘savvy’ financial management are helping Scotland’s law firms boost profitability and confidence.

The sector is enjoying rising profits per equity partner, increasing fee incomes and higher staff numbers, according to a recent survey by accountant BDO.

There has also been a considerable improvement in financial management since the 2008 economic collapse – although 43 per cent of those surveyed believe more insolvencies of Scottish firms are likely, and 86 per cent predict further consolidation amongst mid-tier Scottish firms.

Charles Barnett, professional services partner with BDO, believes Scotland’s legal market will continue to attract merger and acquisition interest from elsewhere in the UK and abroad, and adds: “When the economy started to decline in 2008 law firms were, on the whole, quite slow to respond to the increased financial challenges.

“Many firms which had been around for a very long time perhaps took the view they had survived previous downturns and this would be no different. Others got caught with substantial financial liabilities, which became unsustainable when fee income reduced.

“Our current survey reveals a much more savvy and financially aware group of firms who understand managing the accounts is as important as managing clients and the firm.

“These are positive developments which will position many more firms to take advantage of the improving economy.”

Brodies, named UK Law Firm of the Year at last year’s British Legal Awards, reported a 13.2 per cent increase in revenue to £52.1m in its last financial year, welcomed its 600 colleague and moved into new purpose-built offices in Aberdeen to accommodate its growing team in the city.

“Improving business conditions and a more stable economic background than we’ve seen for a number of years have translated into greater activity on the part of our clients,” says managing partner Bill Drummond.

In 2014, Brodies supported clients in some of the largest M&A deals in Scotland, including Clyde Blowers Capital’s acquisition of the assets of Ferguson Shipyard (in administration), ensuring the survival of the last remaining commercial shipyard on the Clyde.

The Scottish legal market, however, remains intensely competitive.

“The long-term stability and sustainability of our business is something we have sought hard to establish for a decade and more,” Drummond adds.

“In recent times we have seen the loss of many formerly well-known Scottish legal brands, often to takeover activity by larger firms from elsewhere in the UK.

“However, we see no justification for compromising the independence of our firm on the basis we don’t see how this could in any way benefit our clients or, indeed, our own people in the longer term.”

Global law firm DLA Piper closed its Glasgow office in 2013 as part of a UK-wide restructuring and says it is now returning to a period of growth and success in Scotland.

Revenue is up around 14 per cent on the year to date, with net profit also expected to build on last year’s significant gains.

“Our business in Scotland has not reached saturation in any of its core areas and our intention is to continue to grow,” says Simon Rae, DLA Piper’s managing partner in Scotland.

“This will be achieved through a combination of organic growth and lateral hires, with a specific focus on our key transactional teams.”

In 2014, DLA’s Scottish transactional teams successfully completed over 60 Scottish, national and international transactions with an aggregate value of over £4bn.

“With increasing activity levels over the past 12 to 18 months, particularly across transactional teams, the impact of reduced recruitment and lower trainee retention rates during the downturn is starting to be seen,” Rae suggests.

“Attracting and retaining the best talent is becoming a key focus as competition increases both in the Scottish market as well as nationally and internationally.”

Harper Macleod merged with Glasgow-based private client boutique Bird Semple last year to create one of Scotland’s largest private client practices.

Martin Darroch, Harper Macleod’s chief executive, describes a real polarisation of the Scottish legal market, between niche firms on one hand and ‘the international or credible’ Scottish full service firms on the other.

“At present, no firm has a significant slice of the overall legal market in Scotland,” Darroch says. “There are still many small players or those only present in certain disciplines or geographies.

“The opportunity is there to take that pre-eminent position and we intend to do just that.

“As in any maturing market, we also fully expect there to be further change and consolidation.”

Harper Macleod is growing in every area, both geographically and in terms of market share, and has taken steps to accelerate this.

Developments include significant expansion of the firm’s private client offering and increasing office space in Glasgow, Inverness and Edinburgh.

“As the polarisation of the sector continues, we’re seeing increased work coming to us from south of the border, as firms in London and elsewhere look to refer work to a quality firm which is not in direct competition to them,” Darroch continues.

“We’ve always believed in the importance of a strong brand, backed up by the quality and value we represent, and that is paying off.”

CMS, the London-based law firm that completed its merger with former Scottish blue-chip Dundas & Wilson in May 2014, says the transition went smoothly, while the firm has continued to secure new business.

“Amongst the challenges that have come with this process, we have also managed to build our Scottish client base, especially within the small and medium enterprise market,” explains Caryn Penley, executive partner at CMS Scotland.

“We’ve taken on a number of international commissions and remain very active on the deals front, topping the Insider annual table in both the number of deals transacted for clients and their aggregate financial value, which was over £7.7bn.”

Challenges ahead include the expected commoditisation of certain legal services following the so-called ‘Tesco law’ provision of legal licences to non-law firm providers.

“While there is a space in the market for these providers, we have a different ambition for CMS where we’ll continue to offer our clients focused, commercial advice and services non-law providers simply aren’t geared up to replicate,” Penley says.

There are also huge opportunities for Scottish commercial lawyers going forward.

“We produce lawyers of the highest standards anywhere in the world and can leverage this strong reputation by exporting more of our services to the city and internationally,” Penley continues.

Burness Paull, created from the merger in 2012 of law firms Burness, and Paull and Williamsons, grew turnover by a fifth and profits by a quarter in its last financial year, and reports it is currently about 15 per cent ahead in the year to date.

“All our business divisions have performed well during this financial year,” says Burness Paull chairman Philip Rodney.

“We’ve seen particular private equity activity, with investors backing inspiring and successful businesses in a number of sectors, for example technology, leisure and oil and gas.”

The firm is also busy in employment; property, planning and construction & infrastructure; and disputes – particularly in intellectual property – while international work now accounts for around 20 per cent of its business.

But Rodney admits the market remains tough.

“There are still some law firms in the market that haven’t adjusted to life post 2008,” he suggests. “On top of that, we are seeing an increased number of UK firms coming over the border.

“So it’s a very competitive market both in terms of winning business, but also in terms of attracting and retaining talent.

“Being the employer of choice in the sector is crucially important.

“Clients are also requiring flexibility when it comes to billing. It’s not a ‘one size fits all’.

“We need to listen to their requirements, understand the pressures on them and provide options to suit.”

DWF, the north-west-based law firm which merged with former Scots firm Biggart Baillie in 2012, reports the last 12 months have been the firm’s busiest for a number of years, with increased activity levels in Scotland and across the UK.

“The next 12 months will be one of cautious optimism,” says Wayne Lawrence, head of commercial and corporate at DWF.

“The key economic indicators are very much in favour of more sustainable legal activity but, given events of the past few years, nobody should take anything for granted.”

Deal activity has seen a real uplift and the firm’s corporate team has already worked on a number of high-profile deals totalling £200m in the first three months of 2015.

“It continues to be a very competitive market with consolidation, increased regulation and increased client demands,” he adds.

“This changing legal landscape offers both challenges and opportunities, and law firms need to be able to respond to changing client requirements in order to thrive in the evolving environment.

“This shift will see more focus on using technology to enable people to work securely and effectively from wherever best suits them and our clients.”

DWF has invested £12m in technology and business processes to enhance client service.

Pinsent Masons, which merged with Edinburgh-based McGrigors in 2012, recently appointed five new partners – its largest number of new partners in Scotland for more than three years – and welcomed clear signs of a return to growth in the UK.

“The resolution of the referendum unlocked a lot of activity in Scotland in particular, and post-general election we may see more momentum in the economy,” says Richard Masters, partner and head of client operations at Pinsent Masons.

“First, greater competition from new entrants, and particularly non-traditional providers of legal services ranging from start-ups to the Big Four accountancy firms,” he says.

“Second, the ‘more for less’ agenda – where clients want more work delivered for lower fees.

“Third – and linked to this – disruptive innovation.

“Forward-looking firms have already realised they need to embrace greater use of technology and new ways of working if they are to stay relevant to clients.

“Finally, globalisation: this is nothing new but the fact remains that, as a law firm, your clients are generally looking outward and that has consequences for your strategy.”

Maclay Murray & Spens says its banking, real estate, tax and construction teams had been very busy, with litigation and corporate also holding up well.

Instructions across its four offices have included Skyscanner’s milestone Competition Appeal Tribunal process, which involved the defence of transparent pricing in the online hotel booking market; the £155m sale of Oslo-based AGR Group ASA’s global petroleum services division; the launch of a new whisky brand for Isle of Harris Distillers; and the landmark £52.7m acquisition by Scottish Equity Partners of SSE Pipelines from energy group SSE.

Kenneth Shand, Maclay Murray & Spens chief executive, says clients are increasingly looking for support across the UK and beyond.

“We expect this trend to continue in 2015, which reaffirms our strategic vision of building a firm with competence, reach and depth throughout the UK and internationally,” he adds.

“With continued economic recovery, we are confident 2015 will create further opportunities for profitable growth.

“However, as the new UK Government settles in, and with Holyrood elections coming up soon after, it is important for politicians across the UK to focus on building a stable economic environment.”

Andrew Chalmers, chairman of Davidson Chalmers, continues this theme.

He says: “Generally speaking the main challenges facing the legal sector in Scotland are: the continuing political and economic uncertainty across the UK; winning new business within an intensely competitive market; recruiting the right people; investing in new technology; and striking the right balance between business growth with service quality.”

Chalmers says his firm is investing in key growth and service areas, including recruitment, new technologies and marketing, to make the most of available and emerging business opportunities. Key growth areas include renewable energy, health and employment services.

“Whilst there are still a number of challenges facing the Scottish economy, firms that have a well-developed and focused strategy on clear market segments should be able to deliver a positive and successful 2015,” Chalmers concludes.

Top 45 law firm Weightmans entered Scotland in 2013 after the acquisition of part of Semple Fraser. Alongside its Glasgow office, it has seven offices in England and 1,300 staff.

“We have more than trebled the size of our Scottish practice and have broadened our reach from our original built environment offer of commercial real estate, banking and construction to include an industry-leading insurance practice.”

MacFarlane says the built environment team now serves key clients such as Co-op Group, Ford Motors, Staples Group and Santander on a full UK-wide basis, while the insurance department has received instructions and nominations from 20 organisations including insurers, commercial and public sector clients since its inception in September 2014.

“There is still huge competition generally and probably still too many firms in the market,” MacFarlane adds.

“More merger activity seems inevitable in Scotland as firms come to terms with the continuing drive for increased quality and what might have previously been considered added-value service items as part of the standard package and the one basic price.

“That said, on the commercial side, price competition has eased slightly from the ferocity of the last few years and clients are still prepared to pay well for high-quality advice and service delivered in a way that works for them.”

Also in the west of the country, Ayr-based The McKinstry Company acquired Girvan-based Murray & Tait last month.

Founded by Graeme McKinstry thirty years ago the firm has grown organically and through acquisition and now comprises five partners, with eleven solicitors in total across three offices. Murray & Tait was the fourth acquisition made by the firm over the past ten years.

McKinstry says: “Eleven years ago we took the view that for continued growth we either had to find a new service or new markets and given that incremental or organic growth was probably at a peak, we decided the new market would best be achieved by acquisition of other firms thus exposing us to an entirely new clientele.”

At Glasgow-based MacRoberts, managing partner John Macmillan says the market has picked up significantly since the pre-referendum lull, and that the firm expects to improve on last year’s increase in turnover and profits.

Plans for the year ahead include doubling the firm’s headcount in Dundee and the development of a regulatory arm and a new infrastructure team.

“We’ve attracted a number of high-quality new hires recently – bringing in four new partners from DWF to further boost our construction, infrastructure and energy areas, as well as a 10-strong support team,” Macmillan explains.

“John will also bring two colleagues with him as we further grow this area.

“This is part of our intention to grow headcount by 10 per cent this year as we continue our growth strategy.”

Anderson Strathern, which has 52 partners and around 300 staff, lists its key growth areas as commercial real estate, corporate, private client, residential and land resources.

“We’ve found there are opportunities arising for us out of the recent consolidation in the legal market, the disappearance of key names and takeovers by international firms,” says managing partner Murray McCall.

“These events are all allowing us to attract key lateral hires. The challenge is to be ready to take advantage of the upturn in the legal market.”

The firm’s profits rose more than 15 per cent from £6.5m to £7.3m in the last financial year, with another 13 per cent rise forecast for the current financial year.

“The outlook for the year ahead is good,” McCall continues.

“Our financials for the half-year show we are at the heart of the upturn in the Scottish legal market. We have pursued a standalone strategy through the economic downturn, keeping our focus on delivering to our clients and demonstrating with our current growth figures it is not necessary to be taken over or to merge in order to thrive.”

In focus: Law Society of Scotland survey

Scottish solicitors are showing greater confidence in the future of their profession, according to a recent Law Society of Scotland survey.

In the annual survey of members’ views, 61 per cent said they were optimistic about the future of the profession, compared to just 53 per cent in 2013.

“It’s reassuring to see solicitors are more positive about their future as they look to build their businesses following the prolonged downturn,” says Alistair Morris, president of the Law Society of Scotland.

“It’s important that we understand our members’ priorities to help us plan for the future as an organisation and to be able to provide the right kind of support and services they need throughout their careers, to ensure they can meet the needs of their clients and employers.”